A nation of scaredy cats

Looks like fear might be still driving investors and banks into defensive assets, which is putting the squeeze on new business lending. It’s tough to engineer growth this way, and means interest rates will have to fall further.

Is fear the biggest factor keeping interest rates low? Is fear the biggest factor driving the current property boom?

Could be.

Think about it this way. Generally speaking, there’s three things we can do with our savings.

We can stick in the bank and earn interest. That’s the safest route but currently it earns you sod all.

You could buy existing assets, and bank on their returns; or

You could invest in new assets – a new piece of factory equipment, a new building, or a new business concept.

Broadly speaking, this makes up a ladder of risk and return. Money in the bank is low risk, low return. New assets are higher risk, higher return.

Now when the GFC landed on our shores in 2008, there was a rush down the ladder towards money in the bank where it was safe and sound.

It wasn’t just here. The developed world over saw a rush to investment safe-havens.

But as we emerged from the long winter of the GFC, investors started getting bolder, and they stepped out to buy existing assets.

But oddly enough, that’s where it stopped. Investors in Australia and the world over never really stepped any further out along the risk spectrum. Demand for existing assets has been strong. Demand for new assets has been weak.

And that’s one of the things that makes this recovery so unusual. It doesn’t normally take this long for new investment to kick into gear.

And this has become a real headache for central banks. The RBA has brought interest rates down to historic lows. That’s created a bit of a feeding frenzy around existing assets, which has driven their price higher and higher. But investment in new assets has been weak.

In the US, the Fed brought interest rates down to zero, and then just started pumping money into the system hand over fist.

But it never made it’s way into the economy. Companies took the slush and used it to buy-back their own shares. This pushed share prices up, but there was little capital investment or new jobs to show for all that cash.

The recovery dragged on and on, and it still doesn’t look like we’re fully out of the woods.

This is a spanner in the works because new investment is one of the key ‘transmission channels’. It’s supposed to work like this: The RBA lowers rates. Firms borrow to buy new machinery and expand production. They hire new workers. Employment goes up. Output goes up. The people making the machines make more money… round and round it goes.

And ultimately, lower interest rates create more growth.

But that’s not happening right now. The RBA lowers rates. People buy existing assets. The price of those assets goes up, but there’s no new investment, no new production, and no new jobs.

And that’s what’s been happening with housing.

And I think this is why’ve seen some many knitted brows over at Martin Place in the last few weeks.

Because lower interest rates have done exactly what you’d expect them to do for property – they’ve pushed prices up. But that’s happened without the kind of massive pick up in general demand you’d expect to accompany record low interest rates.

And this is a multi-year phenomena.

Take a look at this chart here. This is one I drew up. It looks at bank lending in Australia and looks at the share of lending going to each sector.

What we can see is that there’s been a trend decline in the share of bank lending going to business, and a trend increase in the share going to housing.

In 1990, less than 25% of bank lending was going to housing. This year, it’s over 60%.

2001 was the milestone year. That’s where housing lending on the way up met business lending on the way down. They were an even 45% of the market each. But it’s been one-way traffic since then.

And it might not necessarily have been such a headache for the RBA if that extra lending for housing was going towards new housing – where it would be funding construction and jobs.

But it’s not. Currently 90% of housing finance goes on existing properties. And that’s only going up too. Back in 1985 it was 70%.

So all this is why monetary policy just doesn’t pack the same punch it used to…

And why the boffins over at the RBA have the brain-aches….

And why interest rates will need to fall further yet.

But to do that, the RBA will want to make sure, that from now on, the extra liquidity will get channelled into new assets, not old.

And this, I reckon, is one of the key reasons behind all this talk of macro-prudential tools. They want to encourage new construction, without sending investment lending over the edge.
They’ve got their work cut out for them. Because it’s not clear who’s to blame for these timid investment patterns.

Is it a wary Australian public still nursing wounds from the GFC? Possibly. Is it banks lured to the easy money of property and dropping the ball on business? Probably.

Or is it just what you get when property continues to be a stand-out performer, and the outlook is still looks far and away better than any other asset class, all things considered?

Now I’d say that’s definitely a factor.

It’s hard to know how it will play out in the long run…

But the RBA’s next move? Macro-prudential by the end of the year and rate cuts in 2015.

Comments

The best stimulus idea implemented in the last 10 years was the bonus deduction for business investment. The government needs to roll the dice on something similar again. Why I say “roll the dice” is because it will obviously directly affect their revenue, without any guarantee that they will get the spike in investment needed to re-stimulate the economy and therefore indirectly cover the revenue gap in an already bloated budget deficit.

Who is to blame? Try John Ralph and his committee, who suggested to Peter Costello that capital gains should receive 50% tax discount. You end up with: 6% in capital gain less 6% in interest charges = 3% profit! 6% – 6% = 3% If the CGT discount were abolished or capped, there’d be less demand for appreciating assets, and less appreciation.

Morning John. Do you think there is any likelihood of “carrots” being offered by the government, specifically aimed at generating demand for new, single dwellings built by the mums and dads of this world. Is it worth their while to offer something decent such as the FHOG of days gone by?

I totally agree with your summation of our economy at the moment. All “safe as houses investing”, and no “growth investing. But if you look at the costs of doing business in this country it is not surprising at all, all ëxpenses for utilities by govt or quasi govt suppliers to all sized enterprises are out of control and recording double digit rises. Wages growth whilst subdued at the moment was already at historical highs after the Rudd/Gillard/Rudd years of union domination.
Now the union movement are after all modern awards to ensure a further 10 days paid leave to cater for victims of domestic violence. This eternal cash cow to be milked attitude will see business’s of all sizes give up this country for the joke it is rapidly becoming.
There is a point where industrious business people reject paying for the wastes of the society they see around them!! They just decide that it is all too hard creating something new for not much reward and revert to safer options. That’s where we are now!!

Very true indeed. Labour costs in Australia is extremely high but productivity has not kept up with the increasing wage costs demands. All these sick & personal leave and overtime pays have been so cleverly manipulated by human labour that no existing businesses will want to invest in new investments.

I have personally seen profits fall 70% in my retail business in the last 12 months (due mainly to people just not spending). My rents have not come down, the casual minimum award wages go up 10%+ every 1st of July and I am far from making big profits, as is the perception by most people that everyone in business makes a good income so they shoudn’t complain, let alone receive any sort of government incentives/subsidies (they’re kept for the unemployed and the rights of workers). I am basically struggling to keep my head above water while I provide jobs for 10+ staff and line the pockets of delusional, greedy, unempathetic landlords. And I am not alone. There is absolutely no incentive whatsoever to grow and provide more jobs or invest etc. The attitudes and standards of young workers are atrocious, yet due to minimum award awages I have 16 year old’s earning more than myself per hour. I and many, many other small businesses in the same industry plan to exit the market in the next 5 years. So there you have it, straight from the coal face.

We’re all talking about the multi
pronged (?) problems we face of flagging business investment (in the Victorian
manufacturing sector especially), which is exacerbated by our high costs of
doing business vs. that of our wealthy near northern neighbours labour and
capital costs.

We’re also talking endlessly about
our reactive property investment market, which may be partly low interest rate
driven. There is also an unfortunate (mis) direction of purchase emphasis to
inner and middle suburban existing stock (tax deductions now) v outer suburban
construction stock (harder to buy, less tax effective, longer to wait for the
perhaps lower benefits) which is understandable, given the greater risk and
probable longer term, lower capital growth reward.

We’re forced to look after our own
financial futures by our past, present and most probably future Governments.
The ongoing growth available and relative simplicity of entry into the big city
residential property markets, still provides the most palpable asset for those
willing to risk their own investment strategies v those of the big super funds.

Couple these elements with the relatively easy entry from
those rich near northern neighbour’s populace into our property markets (try and buy land
assets in their countries).

These are our simplistic problems.

What’s the solution ?

Perhaps there is a need to direct
the bank’s investment strategies away from their current “safe as
houses” policy to a greater emphasis into the (riskier) construction side
of the property markets and to capital and general, business investment. In our
“deregulated markets” there’s little that can be done to control and
direct the banks (as probably the most influential drivers of these markets and
to a degree our whole economy).

Is that requiring a greater carrot or stick policy by the Government towards
the banks ?

Is there room to move by Government to option grants and extra tax relief to
business for investment ?

Is there room to manoeuvre a higher degree of protectionist or export support
policies by Government to protect local industry’s competitiveness ?

Is there relevance in the
Government to push to ramp up consumption by increased (controlled) immigration
instead of the seemingly ineffective interest rate driven monetary policy?

Can we place greater restriction on the purchase of property at (inflated)
prices by foreign nationals ?

Can we force banks to lower
barriers to those slightly higher risk business and construction borrowers ?

All seem to agree it’s the lack of reward for risk and effort that is stopping investment in wealth building. While both sides of government continue to increase taxes and charges it’s going to get worse. Unemployment is much higher than reported. Liberals want to increase GST. Our manufacturing industries are being trashed by all sides of government. Welfare and government waste have got out of hand. Consumers have been taxed, and had job losses or if in a job have job insecurity causing them to cut spending.

We need a low taxing alternative political party to the liberal and labour money wasters.
We need a party that supports our industries rather than actively trashing them. We need to stop foreign money from flooding into our realestate market pushing asset prices to levels that in the long run will turn Australians from house owners to renters.

Am I the only one that thinks we need an alternative low taxing political party that supports Australian industry to get the country on track?

We need a party that stops promising what can’t be delivered and deals with reality. Until that happes money will go to assets that hold value but don’t generate real wealth as our economy will continue to go the way of European welfare countries i.e. Become another economic basket case.

The political party you are looking for is right in front of you, though you probably don’t believe they are up for it.

The Greens.

Sustainable goes for the economy just as much as the environment, and they are the only party with a solid, well researched and fair economic development policy. The offer the fairest subsidies for the struggling small business sector that many commenters are a part of and are planning on leaving – this sector could be thoroughly revived and real investment kickstarted again instead of Australia becoming increasingly owned by the Chinese (as well as most of the stuff we are buying manufactured there).

Hi all,
I am in the construction industry and am finding the demand for workable hours is declining every year. in the past – let’s say 1,000 workable hours is required to build a house. today these house are being replaced by units which require 1/3 the hours and budget houses 1/2 the hours required with alternative building methods.

therefore, more people are moving in – looking for hours to work but they are not there – to stimulate the economy, scrap these units that take away people workable hours – spend the same amount of money on building houses where money is spent on wages – which will stimulate the economy.

Who has the guts to tell Australians a great way to stimulate the economy is to stop building high rises (which creates minimal jobs and houses thousands of people who require a job) instead, build quality houses which require quality tradespeople and workable hours (which will help stimulate the economy cos people are working).

I look at the unemployment figures, in my opinion, these figures are very high if they calculate the money requried to earn (hours needed to work per year) to kick start the econmy into a healthy recovery.

I can’t see interest rates going up, a lot of people would be struggling. I’ve been waiting for 12 months for another cut to help stimulate the area where I live.

There is no simple answer to a complex question, & a lot of answers already given are to some degree or another correct. I think our wages, as the dearest in the world, are strangling us as a large component of the problem. Probably the main reason why Holden, Ford & Toyota are closing down. This followed by eons of red tape (NSW is the second most regulated state in the world) is causing inefficiency to add to wage cost & I also think people are sensing these items along with the general global uncertainty. I do not think lowering the interest a few points will make much difference here.

God help us all if the federal government raises GST by 2.5%. Do you realise that is a 25% increase & how much money that will equate to ?

My guess is that the Government will decide to print money to pay its expenses, the way the Yanks have been doing. That would be one way to lower the value of $AUD and help the local economy to compete.
However it would have a big sting in its tail, as the Yanks are about to find out. The currency has no intrinsic value and since Nixon’s bowing to pressure from the international bankers, is no longer linked to the Gold Standard. It is all a “Fairyland Dream”. The quantity of $US in circulation has more than tripled since the GFC. As Jon has said, much of the money has been used by big corporations to buy back stock, forcing up their share prices and consolidating the control of principal shareholders. Most of the money has been sent overseas, on loan to poor countries which are struggling to keep their heads above water.
If and when those countries repay their debts, The US will be faced with inflation, as never seen before. The $US will go the way of the old German Mark – a barrow-load for a loaf of bread!!! That will help get the $AUD moving!!!
On the GST, the ploy is probably to first threaten a big impost, then decide to lower their target, so they can say, “Aren’t we good to you? We worked out how to lift it less than our advisers were suggesting.” – completely ignoring the pre-election promise not to touch GST, without first going to the people in an election, to get a mandate for the increase. Politicians’ opportunistic duplicity will never cease to amaze me! It would be laughable if it were not so damn serious! Abbott has learned well from ‘Honest John’, but so far stops short of having ‘core- and non-core promises’!!!

Why does Australia have such lax laws on foreign ownership of Australia’s assets – particularly housing?? So much of the profit from these investments is being channelled out of Australia. Cutting the wages of workers who spend in our businesses isn’t the solution. Neither is a hike in GST. We need to strategise how we can restrict the type of asset acquisition that directs money overseas and examine tax laws that allow a disproportionately small tax rate for an elite few while people like me in small to medium businesses pay such a huge amount of tax by comparison.

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